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Consider an incumbent rm that produces at constant marginal cost cI and a potential entrant that, after paying a xed cost to enter f, produces the same homogenous good at a cost cE. Suppose the entrant is more ecient, cE < cI : Demand is given by D(p) = ô€€€p with big enough.
1. In the case of no entry, nd the equilibrium price, pro t of the incumbent and the consumer surplus.
2. Compute the condition under which the entrant nds entry pro table (assume > 2cI + cE).
3. Under the conditions found above, if entry occurs compute the equilibrium price and the consumer surplus. Suppose that now, the incumbent can o er a compensation t to the buyer in order to accept and sign an exclusive contract.
4. Elucidate what is the minimal compensation t that induce the buyer to accept the exclusivity contract?
5. What is the maximal compensation that the monopolist is willing to o er to the buyer? Can the incumbent deter entry by o FFering an exclusive contract?
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